As a chart reader I am constantly looking for areas where markets will turn around, noted support and resistance zones. These demarcations on a chart help me to identify where much of the volume lies at certain prices and gives me a great idea of when to enter or exit a position. However, I qualify this by saying these levels will show their hand MOST of the time. When we’re talking selling, there seems to be no ledge that is strong enough to hold. I’ve said many times there is only one reason to buy but a million reasons to sell. When all of those stack up it can be quite overwhelming. We can look for areas to hold and make some predictions based on studies and past history but frankly when there is panic or if we’re on the cusp of panic – then you wait for it. The question you may ask – how long? That’s where the VIX comes in.
For months the complaints have been endless – the VIX is too low, it doesn’t act right, it’s broken and volatility is gone in this market. If you can understand the reasoning for a low VIX it may then be your ‘a-ha’ moment. For months the big calendar trade has been on the SPX options, this being long the SPX put in longer months such as Aug-Oct and short the front month. Well, that short front month is designed to bring in premium to offset the price of buying the long put, but since the VIX calculates based on most active options this has the effect of muting volatility as it relates to the VIX (same type of trade with QQQ/VXN). I won’t go into the details but suffice to say this is a major reason for the market disconnect with volatility. So, on June 15 the June VIX options expired on the opening print, and no surprise when July became front month that the VIX started to rise sharply, closing at a level not seen since March – just after the Japan Tsunami. Unfortunately, today’s move is not indicative of a spike top – but certainly after the SPX has fallen some 80 handles just in the month of June we are probably closer to this event than many people care to believe.
All Together Now – JUMP!
As noted above we can symbolically find levels that should hold in a market fall – but these are paper tigers. Harken back to the Japan disaster in March. We really saw the fear building and the VIX nearly hit 30% – rising more than 80% in a matter of days. There were levels talked about then – 1282, 1274 and then 1262 on the SPX. Those numbers were hit and fell like a hot knife through butter. But why don’t these areas hold? Because sellers know NO support levels, they only know GET ME OUT, I’VE HAD ENOUGH. There is nothing to quantify that natural fear in terms of price levels. When the market is engaged in ‘selling at any price’ these events take time but we’ll see that capitulatory moment soon, where everyone seems to be sick enough to get out entirely.